Scottish Chambers of Commerce endorses BoE’s decision to keep rate at record low

Liz Cameron
Liz Cameron

UK interest rates have been held at 0.5 per cent again by the Bank of England, a decision that has been welcomed by the Scottish Chambers of Commerce.

The latest decision by the Bank’s Monetary Policy Committee (MPC) comes more than six years after the record low was introduced.

Liz Cameron, chief executive of Scottish Chambers of Commerce, highlighted continuing uncertainty over the sustainability of the UK economic recovery as justification for sustaining the policy and emphasised the need for increases in business investment and productivity.

The nine-strong MPC has voted unanimously to keep rates on hold in all its previous meetings so far this year and this week it also kept the size of its bond-buying stimulus programme unchanged at £375 billion.

The half-dozen years of ultra-low interest rates have cut savings’ returns, while mortgage borrowers have benefited from lower repayments.

Ultra-low inflation, which turned negative in April at -0.1 per cent, has put on hold expectations about the Bank raising rates this year.

Commenting on the latest MPC decision, Ms Cameron said: “In its quarterly inflation report last month, the Bank of England signalled that interest rates were unlikely to rise until well into 2016, so this month’s announcement comes as no surprise.

“Though factors such as the partial recovery in oil prices over the course of this year are likely to provide upward pressure on inflation as the year goes on, underlying low inflation and the fragility of the economic recovery mean that the Bank is right to keep interest rates at their historic low for the time being.”

She added: “Though low inflation and the rise in real wage levels are prolonging the ability of consumer demand to drive economic growth, signs of increased business investment and productivity growth are still in their infancy, meaning that there is some way to go still before we can say that the recovery we are experiencing is truly sustainable.”

Recent ONS figures have confirmed that UK gross domestic product (GDP) growth slowed to 0.3 per cent in the first quarter, which was its worst showing since the end of 2012 and Ms Cameron’s stance was echoed by the British Chambers of Commerce (BCC), which said the MPC had made the “right decision” to keep interest rates and quantitative easing on hold.

BCC chief economist David Kern said: “Annual inflation has fallen marginally into negative territory over the past month, raising interest rates in real terms.

“And while inflation will edge up later on this year, it will stay below the Bank of England’s 2% target for the next 12 to 18 months, reinforcing the case for maintaining interest rates for the time being.”

Howard Archer, chief economist at IHS Global Insight, added: “The Bank of England was always a nailed-on certainty to keep interest rates at 0.5 per cent. Indeed, the odds currently strongly favour the Bank of England sitting tight on interest rates (and on the stock of quantitative easing) over the rest of 2015.”

He continued: “We expect the Bank of England to start edging interest rates up in the first half of 2016.

“Current robust consumer activity and signs that housing market activity is picking up suggest that an interest rate hike early on in 2016 is becoming increasingly likely, although the softer set of purchasing managers surveys for May fuel uncertainty over the economy’s current underlying strength.

“Much will clearly depend on how economic growth, earnings and productivity develop over the coming months, as well as just how quickly inflation moves up later on this year.”

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